Operator: Thank you for standing by, and welcome to Fortrea's Q3 2026 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Tracy Krumme, Senior Vice President of Investor Relations. Please go ahead.
Tracy Krumme: Thank you. Good morning, everyone, and welcome to Fortrea's Q3 2026 Earnings Conference Call. With me today on the call are Anshul Thakral, Chief Executive Officer, and Jason Knoblauch, Chief Financial Officer. Before we begin, please note this call is being webcast. There is an accompanying slide presentation, which can be found on the investor relations section of our website, fortrea.com.
Tracy Krumme: During this call, we will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports filed with the SEC regarding these risks and uncertainties, and particularly, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation, which are posted on our website.
Tracy Krumme: Please note that any forward-looking statements represent our views as of today, 29 October 2026, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to nor a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results.
Tracy Krumme: A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the presentation slides that are provided in connection with today's call. Lastly, I would also like to note that Anshul, Jason, and I will be participating in the Jefferies Global Healthcare Conference in London on 17 November. A live webcast and replay of our fireside chat will be available on the investor relations section of our website.
Tracy Krumme: Investors interested in meeting with us at the conference should contact their Jefferies representative or reach out to me directly. With that, I'd like to turn the call over to Anshul, Chief Executive Officer. Please go ahead.
Anshul Thakral: Thank you, Tracy. Good morning, everyone, and thank you for joining us to discuss our Q3 2026 results. Before we start, I'd like to formally introduce our Chief Financial Officer, Jason Knobloch, who many of you have already met. Jason has quickly made a strong contribution to Fortrea, and I'm confident his leadership and experience will help shape our journey in the near and longer term.
Anshul Thakral: Turning to our performance, we are pleased to report another quarter of progress on our return to growth strategy, which is focused on revenue growth and margin expansion. Our Q3 results reflect continued execution across our three pillars: commercial excellence, operational excellence, and financial excellence. They also reflect an important evolution for Fortrea as we focus on the next chapter of our journey, translating improved demand, stronger execution, and disciplined investment into sustainable, profitable growth.
Anshul Thakral: For the Q3, we delivered revenue of $691.5 million, adjusted EBITDA of $58 million, and net new business awards of $773 million, resulting in a book-to-bill ratio of 1.12 times and a trailing 12-month book-to-bill ratio of 1.12 times. We delivered a strong Q3, reflecting continued progress against our strategic priorities. With continued execution against those priorities, we raised the midpoint of our full-year revenue and adjusted EBITDA guidance while narrowing both ranges.
Anshul Thakral: We also recently completed our acquisition of the Early Phase Services business from Worldwide Clinical Trials, expanding our clinical pharmacology capacity, bringing our total beds across the US and UK to more than 570 and adding dedicated bioanalytical and safety lab capabilities. This strategic investment strengthens our early clinical development platform, enhances our ability to deliver integrated solutions to customers, and supports our long-term growth strategy.
Anshul Thakral: Our progress this quarter reflects the work we've done to expand our commercial pipeline, strengthen operational execution, and improve financial performance. Our focus is clear: expand our opportunity set, execute with greater consistency, and build a model that creates meaningful operating leverage as growth returns. I will now walk through our progress against each of these three pillars of excellence. Let's start with commercial excellence.
Anshul Thakral: Our progress is becoming more repeatable and process-driven. Over the past year, we've enhanced our commercial capabilities by focusing on talent, analytical tools, and integrated account management. Our tailored and flexible offerings resonate with customers. Fortrea can operate across multiple service models, which is an advantage if sponsors want providers capable of combining FSO, FSP, and point solutions rather than forcing customers into a single operating model.
Anshul Thakral: Our ability to be agile in providing tailored solutions means we can be a strong partner to innovative large pharma and smaller biotech companies. I remain pleased with the balanced mix of business that we are winning across therapeutic areas, customer types, and geography. Our strategy remains grounded in the 3 Rs: reach, relevance, and repeat. Reach means increasing the aperture of our customer relationships and opportunities.
Anshul Thakral: Relevance means bringing differentiated scientific, regulatory, therapeutic, and operational expertise into the process earlier. Repeat means earning follow-on work by delivering consistently and creating a better client experience. We are seeing progress across each dimension. We are expanding our reach and generating more demand, with the value of our pipeline increasing both sequentially and year over year. The breadth of activity is important. It shows that Fortrea is competing at a stronger position across a broader customer set. China is another important area of opportunity.
Anshul Thakral: China continues to be a meaningful source of innovation within the global drug development ecosystem. We are seeing Chinese biotech companies and global sponsors that are partnering with Chinese innovators seek experienced partners to advance differentiated assets into global development. We appointed a new leader in China over the summer with a mandate to leverage our strong position and drive growth with both China-headquartered biotechs and multinationals.
Anshul Thakral: Stepping back, I would characterize our commercial position this way. The market is becoming more supportive, but our progress is not simply a function of market recovery. It reflects deliberate changes to our go-to-market model, a sharper focus of where Fortrea can differentiate, and greater coordination across our teams. We still have work to do, but the quality and the breadth of our pipeline gives us confidence that we are building a stronger foundation for growth. Our second pillar is operational excellence.
Anshul Thakral: In the services business, as I have said before, consistency is paramount. Clients judge us not only by our ideas or scale, but really by our ability to execute. We remain focused on improving delivery across the areas that matter most; project management, site activation, enrollment, quality, and predictability, just to mention a few.
Anshul Thakral: These represent the daily discipline required to turn backlog into revenue, protect margins, and earn repeat business. Clinical pharmacology continues to be an important example of differentiated execution for Fortrea. Our business benefits from strong scientific capabilities, an integrated global network, and demand for studies that typically convert to revenue more quickly than later-stage programs. We remain focused on building on our leadership position through targeted investment. We recently closed on our acquisition of the Early Phase Services business from Worldwide Clinical Trials.
Anshul Thakral: This transaction is strategically important and signifies our growing confidence as we invest opportunistically for growth. Last week, I had a chance to visit our new sites in San Antonio and Austin, Texas, and welcome our new colleagues. The feedback from clients has been very positive in terms of the added capacity and added capabilities. Our bioanalytical laboratory in Austin allows us to perform testing in-house rather than relying on third parties.
Anshul Thakral: Our clients have been asking for this capability as part of our solutions, and now we can deliver it for them. This in-house capability also gives us greater control over execution and allows us to convert certain pass-through activity into service fee revenue. Our new 200-bed San Antonio facility, that includes a safety laboratory, combined with our Dallas unit, creates a 300-bed Texas network and expands our ability to conduct larger bioequivalence and high-capacity studies.
Anshul Thakral: Across the global network, the transaction means that Fortrea now has more than 570 beds, adding to the scale and speed of our integrated Early Phase offering. Technology is another important enabler of operational excellence. We launched Fortrea Intelligent Technology, or FIT, earlier this year. It combines our data foundation and Xcellerate platform with analytics, machine learning, risk intelligence, and AI, embedding intelligence into workflows our colleagues use to deliver clinical trials. We are delighted to be shortlisted for best use of AI in clinical development and trial innovation in the Scrip Awards 2026. Our approach is pragmatic, outcomes-focused, and responsible, and we continue to make good progress in its adoption. We are developing FIT intentionally, module by module, workflow by workflow, persona by persona.
Anshul Thakral: Our CRA mobile app is now deployed across more than 49 countries, and early data points indicate that it is delivering greater monitoring efficiency, creating capacity for higher value, quality-focused site management. These tools do not replace accountability or judgment. They help our people prepare more effectively, identify risks earlier, and work with greater consistency. As I have said before, our goal with AI is not automation for the sake of automation.
Anshul Thakral: It is to create a force multiplier for our people and our clients. Automation can improve efficiency. Judgment improves outcomes. Our strategy brings the two together with appropriate human leadership in a highly regulated environment. That is also the purpose of a unique internal program that we call Felix. We launched Felix over the summer, connecting AI literacy, practical adoption, and measurable value. Felix combines self-paced learning, instructor-led sessions, and role-specific support.
Anshul Thakral: Employees can earn belts at different levels that equip them to use AI responsibly and confidently based on their role. It is making an immediate impact. For example, more than 95% of our colleagues have integrated AI into their weekly routines. We are confident that we are creating a strong platform of AI literacy and adoption at scale. We are now turning our focus to value realization, embedding AI into priority workflows, and managing outcomes through consistent KPI cadence.
Anshul Thakral: At the same time that we are enabling our employees, we also have taken the approach of having our employees enable Fortrea's growth through innovation. This year, we staged three grassroot innovation hackathons. These events were held across different regions. Together, these enterprise-led and colleague-led initiatives strengthen how we deliver today while building capabilities that can improve productivity, predictability, and client experience over time. Now, let me turn to our third pillar, financial excellence.
Anshul Thakral: Jason will discuss this quarter's financial performance, cash flow, balance sheet, and outlook in greater detail, including the adjustment we made to our reported backlog. We believe this was an appropriate step, and Jason will provide additional context shortly. We continue to operate the business with financial rigor. The major actions to better align our cost structure with the scale of the business are largely complete.
Anshul Thakral: While we will continue to identify opportunities to operate more efficiently, our focus is increasingly on transforming how we work as a global team to drive sustainable growth and margin expansion. Looking ahead, we expect margin expansion to be increasingly driven by revenue growth, favorable business mix, improved utilization, and operating leverage. Mix matters. Our objective is not to grow at any cost. It is profitable growth built on work where Fortrea can deliver differentiated value.
Anshul Thakral: Our infrastructure is positioned to support additional growth without requiring non-billable costs to increase at the same rate. As we have discussed, low single-digit service fee revenue growth should begin to produce incremental drop-through. As growth moves towards the mid-single digits, operating leverage should become even more apparent. That is central to our objective of reaching mid-teens adjusted EBITDA margins. Our continued progress and disciplined execution are reflected in our updated full-year outlook. We narrowed our full-year revenue and adjusted EBITDA guidance ranges and raised the midpoint of both. We continue to manage costs carefully while investing with discipline to support growth and margin expansion. We also remain focused on the balance sheet and capital allocation, and we continue to expect positive free cash flow in Q4 and for the full year.
Anshul Thakral: Our capital allocation priorities remain focused on investing for organic growth, improving productivity, and continuing to delever while pursuing targeted opportunities that strengthen capabilities and meet disciplined return thresholds. As we look ahead, I want to leave you with three key points. First, our commercial opportunity set continues to expand. The market environment is improving.
Anshul Thakral: Our pipeline is broader and stronger than it has ever been, and our go-to-market investments are opening doors across large pharma, biotech, China to global innovators, and new to Fortrea clients. We are now competing from a stronger position. Second, operational execution is strengthening the foundation for profitable growth. We remain focused on quality, predictability, and client delivery while investing selectively in clinical pharmacology, FIT, AI literacy, and colleague-led innovation. These capabilities are intended to help our teams work with greater speed, consistency, and insight. Third, financial discipline remains central to our strategy.
Anshul Thakral: With the major cost actions largely complete, our focus is increasingly on converting stronger demand in bookings into service fee revenue growth, improving mix and utilization, and capturing the operating leverage embedded in our model. Most importantly, none of this progress would be possible without our colleagues around the world. As we prepare for what is ahead, we are committed to humans in the lead. Experience, agility, and dedication of our people are the foundation of our client and site relationships, of our quality, and of our ability to innovate. We are asking a great deal of the organization as we return to growth, and our teams continue to respond with commitment, accountability, and energy. Jason, I will turn the call over to you to discuss our Q3 financial results in more detail.
Jason Knoblauch: Thank you, Anshul, and thank you to everyone for joining us today. Before turning to the results, I would like to say how pleased I am to have joined the Fortrea team. I have been particularly encouraged by the focus I see on the customer experience and continuous improvement, and I intend to do my part to foster successful outcomes on our strategic imperatives. Now let us turn to the financials. The Q3 was another solid quarter demonstrating continued progress on our strategy. Before getting into the details, I would like to briefly highlight our progress against financial excellence, the third pillar of our growth strategy. First, we achieved a book-to-bill ratio of 1.12 times in the quarter, compared with 1.06 times in Q2 2026 and 1.13 times in Q3 2025.
Jason Knoblauch: This Q3 performance sustained a trailing 12-month book-to-bill ratio of 1.12 times. Second, we continue to drive improvements in adjusted EBITDA, reflecting the benefits of portfolio mix as well as continued progression of our cost optimization and efficiency initiatives. These outcomes are a nice reflection of the commitment and performance exemplified by our talented workforce, one in which we have been making increased compensation investments this year. Now I will cover the financial results in more detail. Q3 revenue was $691.5 million, 1.4% lower than the prior year quarter and 2.0% higher sequentially. This compares with revenue of $701.3 million in the Q3 of 2025 and $678.2 million in the Q2 of 2026.
Jason Knoblauch: Our Q3 revenue represented backlog conversion of 8.9%, representing a 30 basis point acceleration versus the Q2 of 2026, driven primarily by conversion in the FSO part of our portfolio, as well as in FSP contracts. The year-over-year decrease in revenue during the quarter was driven primarily by a slower conversion rate within the pass-through element of backlog. On a GAAP basis, direct costs in the quarter decreased 4.6% year-over-year and increased 2.4% sequentially. Both periods were largely impacted by fluctuations in pass-through expenses. SG&A in the quarter decreased 2.8% year-over-year and increased 1.7% sequentially. The year-over-year change was driven primarily by continued management of our operating expenses, the non-recurrence of certain credit loss provisions in the prior year, and a decrease in one-time spin-related costs.
Jason Knoblauch: Adjusted EBITDA for the quarter was $58.0 million, compared with $50.7 million in the Q3 of 2025 and $58.7 million in the Q2 of 2026. This represented an increase of 14.4% year-over-year and a decrease of 1.2% sequentially. Adjusted EBITDA margin was 8.4%, compared with 7.2% in the Q3 of 2025 and approximately 8.7% in the Q2 of 2026, representing a 120 basis point increase year-over-year and a 30 basis point decrease sequentially. The year-over-year margin expansion was fueled by continued improvement in the mix of our portfolio, as well as good performance on our cost management and efficiency initiatives, which combined were more than 300 basis points of impact. These gains were partially offset by increases in compensation investments in our workforce, including incentive compensation funding.
Jason Knoblauch: For the nine months ended 30 September 2026, adjusted EBITDA margin was 8.2%, as compared to 6.6% for the nine months ended 30 September 2025. This 160 basis point expansion versus prior year was enabled by improvement stemming from the impact of changes in the mix of our portfolio, as well as good performance on our cost management and efficiency initiatives. This was partially offset by increases in compensation investments in our workforce, including incentive compensation funding, as well as 60 basis points of foreign currency headwind. Interest expense for the quarter was $20.2 million, compared with $22.6 million in the Q3 of 2025 and $19.3 million in the Q2 of 2026. The year-over-year reduction is due to paydowns of borrowings on our senior secured notes and revolver during the H2 of 2025.
Jason Knoblauch: Compared to the Q2 of this year, the increase in interest is due to higher benchmark interest rates on our variable rate debt, which is about 40% of our total gross debt when considering interest hedges in place. Turning to our tax rate, during the Q3, we recognized income tax benefit of $4.2 million, resulting in an effective tax rate of 116.7%. Our quarterly result was impacted by the timing of certain elements of our tax provision. Moving to net income and adjusted net income. In the Q3 2026, net income was $0.6 million, compared with a net loss of $15.9 million in the Q3 2025 and a net loss of $13.2 million in the Q2 2026.
Jason Knoblauch: Adjusted net income for the quarter was $27.9 million, compared with $11.7 million in the Q3 2025 and $22.7 million in the Q2 2026. Adjusted basic and diluted earnings per share were $0.29 and $0.28 respectively, compared with $0.13 and $0.12 in the prior year quarter and $0.24 and $0.23 in the Q2 2026. In terms of customer concentration, our top 10 customers represented 53.5% of revenue in the quarter, compared with 60.0% in the Q3 2025 and 55.4% in the Q2 2026. Our largest customer accounted for 17.6% of Q3 revenue, compared with 19.8% in the prior year quarter and 16.8% in the Q2 2026.
Jason Knoblauch: Backlog, which includes both direct fee value as well as pass-through fee value, was $7.3 billion at the end of the quarter, compared with $7.8 billion at the end of the Q2 2026 and $7.6 billion at the end of the Q3 2025. Cancellations during the period were within normal bounds, albeit slightly elevated. In addition to the cancellations and contract amendments that occurred during the quarter, we also recorded a cumulative adjustment to backlog of $558 million. This adjustment reduced the value of backlog such that our resulting balance is a more appropriate estimation of remaining revenue expectations for the contracts in our portfolio. This adjustment was not part of reported net book-to-bill. Additionally, it does not have an impact on reported financial results or revenue planning.
Jason Knoblauch: It is simply an accumulation of ordinary course changes that can and do occur in the scope needed to fulfill our customer contracts, and it is inclusive of trials that can slowly become inactive. I'd like to now turn to our cash flow performance. We generated $60.8 million of operating cash flow and $52.5 million of free cash flow in the quarter, representing improvement versus the Q2, which had $28.9 million operating cash flow and $19.9 million free cash flow. The sequential improvement in cash flow was primarily driven by net DSO, which I will discuss shortly. For the nine months ended 30 September 2026, operating cash flow was a positive $72.7 million, compared with a negative $15.6 million in the prior year period.
Jason Knoblauch: Free cash flow for the first 9 months of 2026 was a +$47.4 million, compared with a -$33.3 million for the first 9 months of 2025. Key contributors to the improved cash flow performance include growth in adjusted EBITDA, improved net working capital, reduced cash interest, and fewer one-time costs. Net DSO was 15 days as of 30 September 2026, compared with 33 days as of 30 September 2025, and 20 days as of 30 June 2026. This represents an 18-day improvement year over year and a 5-day improvement sequentially, primarily reflecting continued execution in our order to cash process. We ended the quarter with no borrowings outstanding on the revolver, consistent with the preceding 4 quarters. Combined with cash and cash equivalents, our available liquidity was approximately $668 million at quarter end.
Jason Knoblauch: Our gross debt balance at the end of Q3 was $1.066 billion, and our net debt was $845.7 million, which results in net leverage of 3.9x. Over the last 12 months, we have improved net leverage by 1.4 turns due to a combination of EBITDA growth, debt paydown, and cash accumulation. The 19 October closing of the acquisition of the Early Phase Services division of Worldwide Clinical Trials will only slightly impact our liquidity and net leverage, with the latter impacted about a quarter turn of leverage. We expect to maintain ample liquidity and flexibility under our financial covenants for the foreseeable future. Our capital allocation continues to be oriented toward investing for organic growth and productivity, maintaining optionality in our capital structure and steady de-leveraging. Now moving to full year guidance.
Jason Knoblauch: As Anshul Thakral discussed, we raised the midpoints of our full year 2026 revenue and adjusted EBITDA guidance while narrowing both ranges. We now expect full year revenue of $2.665 billion to $2.690 billion, and adjusted EBITDA of $210 million to $218 million. In closing, our Q3 and year to date results reflected good improvement in our business performance and progress against our three pillars of excellence. Our performance was by no means a reflection of our fullest potential. As we look ahead, we are encouraged by both external demand signals and internal capability to drive profitable growth and margin expansion. We continue to expect that margin expansion to come from favorable business mix, improved utilization, technology-fueled efficiencies, and operating leverage as we grow service fee revenue.
Jason Knoblauch: We are going to continue to build and iterate toward those outcomes, and I look forward to continuing the conversation with many of you in the months and quarters ahead. We will now open the call for Q&A. Operator, you can now open the lines, please.
Operator: Before we proceed to Q&A, the company would like to remind listeners that non-GAAP measures are not a substitute for comparable GAAP measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release, current presentation, and Q2 2026 and Q3 2025 presentations on the Fortrea investor website. As a reminder, to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. You will be limited to one question and one follow-up to allow everyone the opportunity to participate. Please stand by while we compile the Q&A roster. Our first question comes from the line of Elizabeth Anderson of Evercore ISI. Your line is open, Elizabeth.
Elizabeth Anderson: Hi, guys. Thanks so much for the question, and congrats on a nice quarter. I wanted to ask maybe a two-parter. One, you know, the EBITDA guide for the Q4 maybe came in a little bit below what we were expecting, given the ramp. Can you talk about the factors that might be impacting the Q4 guidance. Secondarily, on the Worldwide acquisition, can you talk about how does that work with the TSA? Obviously, I'm sure those facilities are mostly full now. Or when do you start selling in? You're supporting those clients. If you could just help us talk through those dynamics conceptually, that would be helpful. Thank you.
Jason Knoblauch: Okay, great. Thanks for the question, Elizabeth. Jason here. In terms of the Q4 guide, a couple of variables at play. We do expect a little bit of a sequential slowdown in revenue, and that's really just a function of the number of working days that are in Q4 versus Q3. Q3 was a nice quarter in terms of available capacity of working days to generate revenue. With that revenue and number of working days also just comes a little bit of enhanced leverage in the profile. That's really a primary item that's driving our guide for Q4. We do have a little bit of a step-up sequentially in some of the IT OpEx investment that we're making. But that's a secondary factor to the sequential revenue dynamic and the resulting impact on productivity.
Elizabeth Anderson: Thank you.
Operator: Question on TSA.
Jason Knoblauch: In terms of your question on the TSA, we do have an arrangement in place that canvasses a number of different support functions in areas across HR, IT, finance, et cetera. I think your question was also starting to touch on just sort of the commercial apparatus. Just recall, we already today have been working pre-acquisition. We have been working a bit with that business as they have been able to help augment some of the patient needs in our portfolio and CPS. The commercial conversion is starting. It is just one of those areas that is going to take a little bit of time to play out.
Operator: Thank you. Our next question comes from the line of Eric Coldwell of Baird. Your line is open, Eric.
Eric Coldwell: Thanks very much, and good morning. I wanted to hit on the backlog adjustments. It felt like this number was a bit more than you were indicating in the past. I think you had thrown around low single digit to mid single digit impact on previous backlog. Maybe it was a touch higher than I felt like it might be. It also seemed like it was perhaps a bit broader in scope, and that could just be the language that you use to define it versus a recent peer adjustment. It does seem like it is more than just inactive trials. So I am hoping to get a little more color on the adjustments and then perhaps what portion was solely inactive trials, and if there was stuff beyond that, what exactly it was.
Eric Coldwell: Sorry for the three parter on one topic, but your wording on no impact on revenue in the near term felt like it left open some potential that this actually would temper your perhaps intermediate or longer-term revenue thoughts. So yeah, three topics on the backlog, if you could.
Jason Knoblauch: Sure. Okay. Yep. Thanks, Eric. Look, our work only completed on the assessment in Q3, so team's been working to assess the contract positions, the backlog positions across our portfolio, FSO, FSP, CPS. Ultimately, the goal of the exercise is to ensure that we come out of it with a backlog value that is more appropriately representative of the remaining life revenue on the contracts that we have in the portfolio. It is a mix of both inactive study dynamics as well as what we internally will call not to deliver dynamics within parts of the portfolio as well. That's just a natural byproduct of the ebbs and flows that happen in clinical development. The inactive studies, the way those often start to develop is slowly, right?
Jason Knoblauch: A study might go on pause, or a sponsor might be thinking about reprioritization of their investment allocation and so on and so forth. There's often not a bright line in terms of whether it's canceled or not. You have a number of situations that have some ambiguity around them, and ultimately, what we're doing through this adjustment is getting our backlog to a point that better reflects the rest of life revenue, which is what it's intended to be. In terms of near term versus longer-term impact, this does not impact any of the variables that have been going into our revenue recognition. It doesn't impact any of the variables that have been feeding into our near and medium-term revenue modeling. In these studies, in this business, this backlog is representative of many, many years of revenue value.
Jason Knoblauch: The bleed-off goes out 10+ years at the bottom end of the spectrum. That's why ultimately we've characterized it the way that we have.
Operator: Our next question comes from the line of Luke Sergott of Barclays. Please go ahead, Luke.
Luke Sergott: Great. Thanks for the question. I just want to talk about the gross margin improvements that you guys saw. If you back out the pass-through, it had pretty sizable step-up there year-over-year and even quarter-over-quarter.
Luke Sergott: There is a lot of moving parts here, I guess, as you are thinking about mix from customers and FSP versus FSO. So walk through what were the changes. Are we starting to see some improvements on the initiatives that you guys enacted over the last couple of years? The second part is unrelated, but on the burn rate, if you adjust for the 600 out of the backlog, the Q4 guide implies a modest step down in burn rate. Should we be thinking about that roughly about 8.5% burn rate as a good jump-off point to think about what 2027 could look like?
Jason Knoblauch: Yep. Okay. Jason, again, I appreciate the question. So yeah, look, we feel good about the progress we have been making in all parts of our P&L and the margin. So I think your question was primarily focused on gross margin. One of the nice features playing out in our results already, and we expect it to continue to take a more pronounced effect, is this portfolio mix conversion that Anshul and team have been talking about. So we are seeing as the revenue and the backlog and the contracts within it all start to convert to a nature that are higher economics for us, if you will. That has been a part of the apparatus of driving some of the gross margin improvement year-over-year.
Jason Knoblauch: But also our operations team has been really driving a number of efficiencies in terms of how we convert that backlog and that revenue to our gross profit margins. I think we have characterized within all that is all happening against the backdrop of a non-inconsequential headwind associated with some of the investments, and they are good investments that we are making in the compensation of our workforce, that is on the order of magnitude of a couple hundred basis points. So feel good about the progress we are making, feel good about the continued progress that we expect that we will be making over the horizon as well.
Luke Sergott: Q4 burn rate
Jason Knoblauch: In terms of the Q4 burn rate, yeah, I think that is about right in terms of the percentage conversion assumption for Q4. It goes back to that working days dynamic that I mentioned. But we have been seeing some nice step-up in that conversion rate. So putting aside some of the period-to-period fluctuations that can happen in terms of the days of capacity, I think we are on the right track and trajectory there.
Operator: Thank you. Our next question comes from the line of David Windley of Jefferies. Please go ahead, David.
[Company Representative] (Jefferies): Hi, it is Cassidy on for David. Thanks for taking our questions today. Could you just provide a little bit of context on the demand that you are seeing, firstly by customer cohort and then business segment, phase I versus phase II, and FSP versus FSO? Thank you.
Anshul Thakral: Sure, Cassidy, I will take that. Appreciate it. Look, I think, as we have seen, as other peers have reported out and other elements of the pharma services sector have reported out, I think we are starting to get into the middle of this market recovery. I am starting to get optimistic about where the market is headed and the overall recovery, and the growth at which pharma services is starting to grow again. I think that is now starting to become a clear signal across not just CROs, but across the sector. So that is good.
Anshul Thakral: As I have said in the past, and our numbers show the same thing, biotech recovery came faster. We saw good growth here this year in biotech. If I look at our bookings, we saw almost double-digit growth in biotech bookings here in 2026. Biopharma recovery is coming quickly on the heels of that.
Anshul Thakral: If I look at our RFPs going forward for the next quarter or two, we are seeing a lot more coming in from biopharma than we were historically. So it is playing out as we had talked about, as we had predicted. Biotech recovery came faster. Biopharma recovery was a little bit slow, but now we are square in the middle of the recovery market where both biotech and biopharma sectors are generating RFP flow and pipeline flow for us that we are excited about.
[Company Representative] (Jefferies): Thank you.
Operator: Thank you. Our next question comes from the line of Jailendra Singh of Truist Securities. Jillendra, your line is open.
Jailendra Singh: Thank you and good morning. Thanks for taking my questions. Actually, I want to ask about the large pharma partnership. Are you seeing any meaningful changes in wallet share there or sourcing behavior among your largest pharma customers heading into next year? Some of those CROs have talked about scale becoming a bigger factor in winning work with these sponsors. Just curious what your observations have been, and is this consistent with what you are seeing?
Anshul Thakral: Jillendra, I appreciate you asking that question. I think there's a couple of points I would make. One is, as I just said to Cassidy, we're seeing an inflow of RFPs now coming in from biopharma, not just our existing customers, but as I'd mentioned last quarter, we've been invited into processes for various biopharma refreshes, new RFP models, new outsourcing models, et cetera, that we hadn't been invited to in the past.
Anshul Thakral: In fact, recently, we've actually won one of those, and we're excited about that. That should start converting into awards in 2028. Your question around does scale matter in biopharma, I would argue that's not a new trend. Scale has always mattered in biopharma, and I think biopharma companies continue to see the viable players in that market to be the top six CROs, us included, the ones with established global footprints and global scale.
Anshul Thakral: That's always mattered. It continues to matter, and I'm excited about the existing new processes that we're engaged in now.
Jailendra Singh: Then a quick follow-up on Worldwide Clinical Trials acquisition, the Early Phase Services. With this deal, how is your approach changing on going after CPS work? I understand it increases the capacity. You can go after more work, but does this deal also make you more price competitive? Does it get in front of new sponsor, or is it more about going deeper with current sponsor partners? How quickly can we start seeing that in bookings numbers?
Anshul Thakral: Well, I think, look, it adds new capabilities, as I have suggested. One of the things our sponsors have been asking for, and one thing I would tell you, Jailendra, and I appreciate the question, part of what led to us doing this acquisition is really our clients and our sponsors asking for a certain set of capabilities. They love working with Fortrea, and the two big were our own bioanalytical lab, so that we can have an integrated approach between bioanalytical labs, safety labs, and the CRUs, which we now can. An expanded network, especially in Texas now. Within a few hour drive, we've got a 300-bed network, which allows you to do larger cohort bioequivalence studies at an economics that makes a lot more sense.
Anshul Thakral: So this is really about adding capabilities, not just capacity, and those two new capabilities open up a little bit of the TAM for us in this sector. As far as bookings conversion, look, we closed the deal last week. We got our first award yesterday for bioanalytical lab services that is a Fortrea client. I think the bookings conversion will come. I am not going to tell you which quarter. I think the sales team is out working it since we closed the deal last week, and I look forward to some early results here.
Operator: Thank you. Our next question comes from the line of Kevin Caliendo of UBS. Please go ahead, Kevin.
Kevin Caliendo: Hi. Thanks for taking my question. Appreciate it. I wanted to follow up on Jailendra's question a little bit in terms of Worldwide. I understand strategically this step. Is this the last step for you, Anshul, when you think about where you want this company to be in a couple of years? What's the additional capabilities that you're getting from this now, understand the impact that it has and the capabilities? I'm guessing this isn't all the capabilities that you want to have. If you think about where you want Fortrea to be in three years or five years, what else do you want to add to the suite? What else do your customers want you to do? Maybe that's a better way to ask it.
Anshul Thakral: Well, I've been here about 15 months, so it'd be hard if this was my last step, Kevin. I appreciate you initiating coverage and welcome back to the sector. No, I'd say this is our first step. First step in a long journey. A long journey in establishing, marching towards our goals, but establishing Fortrea as a CRO of choice when it comes to evidence generation. The theme by which we're going to pursue growth is evidence generation. We want to be able to support our sponsors, big, medium, small, across the spectrum of evidence generation, everything from first in human, to post-approval services. That's our goal.
Anshul Thakral: There's areas in which we'll continue to look for opportunities to fill capability gaps, both through organic investments, some of which we're making now and some of which show up in our numbers, as well as inorganic acquisitions such as this one. I would say, Kevin, I appreciate the question. This is the first step in a long journey.
Kevin Caliendo: Thanks.
Operator: Thank you. Our next question comes from the line of Justin Bowers of Deutsche Bank. Your line is open, Justin.
Justin Bowers: Hey, good morning. Just going to stick with the M&A there. In the prepared remarks in the deck, you talk about that asset being EBITDA profitable in 2027. Just would like to understand the course of action to get there and what initiatives to drive EBITDA profitability.
Jason Knoblauch: Yep, Jason here. Thanks for the question, Justin. Our team's already been working to integrate it. Primary focus out of the gates has been on the commercial apparatus around it. The exercise that's happening by day, by week at the moment is our very large pipeline of CPS opportunity work through the sales cycle. It's getting this business embedded into that pipeline and the conversion of the opportunities and really starting to fill up their funnel. A lot of that work would've come through our 606 numbers anyway, and this is just kind of now repiping some of it into the direct fee profit-generating part of our P&L and CPS.
Justin Bowers: Okay. Somewhat related, but also somewhat separate. Could you talk a little bit about the CPS sales cycle, the lead times, and how that business is booked and what investors should do to take that into consideration when comparing book-to-bills to you versus peers that don't have as much exposure to that business?
Anshul Thakral: Yeah. Look, I think that's a great question. Sales cycles in CPS tend to be shorter. Studies tend to be shorter and faster burning. We can have a client, especially some of our big pharma partners who've now run dozens of studies with us in any given year, make decisions and we could be starting a study up in a matter of 2 months. We can have sales cycles last anywhere from 6 weeks to 5 or 6 months, depending on the size of the company and whether it's big, medium, small, how well-funded it is, et cetera. But the sales cycles tend to be faster in CPS than they do in the global clinical development. The studies tend to burn faster than they do in global clinical development.
Operator: Thank you. Our next question comes from the line of Charles Rhyee of TD Cowen. Your line is open, Charles.
Charles Rhyee: Yeah, thanks for taking the questions, and welcome, Jason. Just sticking on the financials and thinking as we think about next year, obviously a lot of great improvements over the last year and a half plus, Anshul, since you have been here. Just trying to understand, because I believe in the past, and obviously this predates you, Jason, but the discussion of where at the current scale we can see margins getting to. I think Anshul, you guys had talked about, with the current structure, getting to a mid-teens is a very reasonable area to get to. Obviously, we are at 8.5% right now. We have had what, 14, looks like we are on track for mid-teens EBITDA growth.
Charles Rhyee: Any reason why this kind of progression, given the demand environment we have been in and the progress we have made, that we could not see something similar as we are trying to get back to, let us call it a target margin range of mid-teens? Anything that would hamper that, or is that a fair way to think of the current trajectory?
Anshul Thakral: Look, I appreciate the question, Charles. I think as you said, getting back to what I would consider competitor-level profitability margins, defined as competitors of size, scale, and breadth of services that we have, getting into that mid-teens margin remains our true north. It drives a large part of our strategy. The strategy at Fortrea is growth and margin expansion.
Anshul Thakral: Currently, we see a clear path. It is not easy. You got to work at it. You got to work month by month, day by day, quarter by quarter. But that is the path we are on. As the market environment continues to get favorable, that is a positive. As the market environment gets favorable, bookings remain consistent. Those consistent bookings continue to translate into revenue growth, and that revenue growth continues to drop closer to the bottom line, as we have talked about in the past.
Anshul Thakral: From everything I have said to you the last quarter and the quarter before that remains our true north. That is what we are marching down, and I think this quarter is a demonstration of, and of evidence along that journey. I think it was one of your colleagues who picked this up and asked the question earlier around gross margins. I think gross margins, when you back out pass-throughs, that is really what tells you the health of the business and the progress that we are making against that true north.
Jason Knoblauch: Yeah, I can maybe-
Charles Rhyee: That is helpful.
Jason Knoblauch: I will add some additional context to that. If you just look at our year-to-date September performance, I think you have seen a 606 margin expansion of 160 basis points, as Anshul just alluded to. Go up the chain a bit into 605 margin performance, and we had north of 200 basis points of expansion, and that is more than 200 basis points of expansion that occurred with negligible direct fee revenue growth. We have now, in the last two quarters, started to reach a different plateau on that, so feel good about how that is going to continue to build. That is more than 200 basis points of direct fee margin that has happened, despite some of that compensation investment that we made, which is on a 605 basis is in and around 200 basis points as well. The kind of portfolio mix is playing out.
Jason Knoblauch: The efficiencies of the business are playing out. As I mentioned in my opening remarks, we have a number of different avenues that we are going to continue to bring to life next year and beyond.
Charles Rhyee: Great. If I could just quick follow-up. I think in the comments when you talked about cancellation of the quarter, forgive me if I missed it, but you mentioned about contract amendments. Can you talk about what that generally entails and how typical is that as well? Thanks.
Jason Knoblauch: Yeah. It is really just kind of lumping together both the concept of cancellations and negative contract amendments, versus the positive ones. The quarter was slightly elevated in terms of what actually came through and consummated in the quarter, and that was part of our book-to-bill, but it was not materially elevated. So definitely within one standard deviation.
Operator: Thank you. Our next question comes from the line of Albert Hu of Citi. Please go ahead, Albert.
Albert Hu: Perfect. Thanks for taking the question. So maybe on the book-to-bill, it seems like the trailing 12 months currently 1.12. How do you guys see this playing into growth for next year? I think Street has you guys at the high end of low single digits right now. Do you guys see this as doable? Is there anything that makes this assumption unreasonable? Appreciate the color. I have a follow-up.
Jason Knoblauch: Yeah. I will start, and Anshul can add to it, supplement. Look, we are not giving any guide on 2027 at this particular juncture. We have got a heavy set of commercial efforts happening now and over the next few months to get our Q4 contracts in book solidified. Feel good about, as we have alluded to, feel good about where the pipeline is at. Feel good about the opportunity that we have got for Q4, but we ultimately need to get that in print and then we will be working through some of our revenue expectations and guidance thereafter.
Albert Hu: Okay, perfect. Thank you. And maybe on China, some of our conversations have been related to the COINS Act proposal recently on restricting investments in Chinese biotech. It does not seem like that has affected China for you guys in terms of your conversations. Maybe if you can break down for us more on what you have seen China in the quarter. I know we called out China biotech being strong, so maybe additional color there would be helpful and then any conversations you guys are having potentially with this COINS Act proposition. Appreciate the color.
Anshul Thakral: Sure. Look, as you know, one of our colleagues, Sandy Kennedy, is in a leadership position at ACRO, which allows us to really work with that group and keep on top of the various things happening in DC. Look, I am not going to comment on the geopolitics here, but from everything we can see, the concept of service providers is not impacted. If we look at our China business, we look at where we are getting the biggest amount of growth, and we happen to be an at-scale player, which not everybody is an at-scale player in China. We happen to have that history in being an at-scale player. It is two places. Multinational companies continue to invest in clinical trials in China using Fortrea as one of their CROs to provide those services.
Anshul Thakral: Also for Chinese biotech companies who are looking to go global and run clinical trials of innovative medicines from China in the US and Europe, Fortrea happens to be one of the preferred players that those companies go to. That trend for both in terms of pipeline, RFP, and bookings has been positive here over 2026 for us, it continues to be a healthy tailwind for us.
Operator: Thank you. To save for time, we ask that you limit yourself to one question. Our next question comes from the line of Ann Hynes of Mizuho Securities. Your question please, Anne.
Ann Hynes: Hi, good morning. I know you are not giving 2027 guidance today, but is there any kind of high level headwinds or tailwinds that you want to highlight for us? Thank you.
Anshul Thakral: As Jason said, we are not giving 2027 guidance. I think what we have talked about in the past, what I think for the entire sector, this is not just a Fortrea comment, as the sector continues to be square in the middle of recovery and as bookings continue to come in and be consistent, not just elevated, but consistent, which is really important, which is something we drive for to make sure we have got consistent growth quarter over quarter, that is what will yield how 2027 plays out.
Operator: Thank you. Our final question comes from the line of Jared Haase of William Blair. Your question please, Jared.
Jared Haase: Hey, guys. Thanks for squeezing me in here. I want to go back to the prepared remarks. You talked about some of the areas where you are focusing on improving service delivery and sort of this mindset of operating excellence. I just wanted to clarify, when you talk about some of these areas like project management, enrollment, et cetera, how much of execution there is a technology innovation story? I know you talked a little bit about the CRA mobile app as an example. So how much of that is tech versus restructuring how you manage your teams, you may be doing more oversight and training, things like that, more people management, I guess, in a sense, to drive that execution?
Anshul Thakral: Sure. Jared, it is a bit of both. At the very beginning, when I say very beginning, I say beginning of my tenure, let us go back 15 months, it was probably more the former, and now it is starting to shift to a more balance of the two levers that you talked about. It is about making sure we are really seen as a professional services organization. A professional services organization that is responsible for project delivery, not just task delivery. And what that yields is not just better economics in how we prosecute the backlog, but it actually yields happier customers, better throughput, better output, on-time delivery, and higher levels of repeat business, reputation in the marketplace, which helps our commercial apparatus.
Anshul Thakral: The technology piece is now starting to come into bear as FIT comes more online, is actually starting to get additional process improvements and efficiency through these organizations that I mentioned, through technology. But it is a bit of both.
Operator: Thank you. I would now like to turn the conference back to Anshul Thakral for closing remarks. Sir?
Anshul Thakral: Thank you everyone for your continued engagement. As we close, I want to reinforce that our Q3 performance reflects continued progress against our strategy. We are expanding our commercial opportunity set, as I have said. We are strengthening operational execution, and we are maintaining financial discipline as we position the company for more profitable growth. The demand environment, as we have spoken about today, is clearly improving. Our commercial model changes are gaining traction, and our infrastructure can support meaningful operating leverage as service fee revenue returns to growth. While there is still work to do, we are confident in the strategy, we are encouraged by the progress, and we are converting this momentum into sustainable growth, margin expansion, and ultimately, that leads to longer-term shareholder value creation. Thank you for joining us today.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
